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Apr 06

The pivot point is the level at which the price action changes direction for the day. Using  the previous days high, low and close, a number of price levels is determined. These price levels often prove to be critical support and resistance levels.

The pivot level and support-/resistance-levels are usually called pivot levels.

Every day the market you are following has an open, high, low and a close for the day (some markets like forex are 24 hours but generally use 5pm EST as the open and close). This information basically contains all the data you need to calculate the pivot levels.

The reason pivot point trading is so popular is that pivot points are predictive as opposed to lagging.  Professional traders use these levels a lot, which tends to attach an aura of self-fulfilling prophesy to them.  Because professional traders follow pivot points you will often find that the market is honouring these levels.  It would be smart to be aware of that and anticipate such price action.

This is how the various levels are calculated:

  • Resistance 3 = High + 2 * (Pivot - Low)
  • Resistance 2 = Pivot + (R1 - S1)
  • Resistance 1 = 2 * Pivot - Low
  • Pivot Point = ( High + Close + Low )/3
  • Support 1 = 2 * Pivot - High
  • Support 2 = Pivot - (R1 - S1)
  • Support 3 = Low - 2 * (High - Pivot)

By recording the previous day’s high, low and close you’ll be able to derive 7 price levels, 3 of which are resistance levels, 3 are support levels and the middle one being the actual pivot point.


A Pivot Point example

The following EUR/GBP-chart shows the Pivot Point line, but leaves out the R3- and S3-lines:

Pivot point trading

The green line is the pivot point, the grey lines below it are the S1- and S2-lines, the grey lines above the green pivot point line are the R1- and R2-lines.

If the session opens above the pivot point then the bias for the day is for long trades, at least as long as price action remains above the pivot point. If the session opens below the pivot point then the bias for the day is for short trades, at least as long as price remains below the pivot point.

The three most significant pivot points are R1, S1 and the actual pivot point.

The basic tenet behind trading pivot points is to search for a reversal or break of R1 or S1. Should price action continue in the direction of the break and reach R2, R3 or S2, S3 the market will have turned overbought or oversold. At these levels one should look for exits rather than entries.

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